HEADQUARTERS: Los Angeles
YEAR FOUNDED: 2015
2017 REVENUE: $3.7 million
In 2015, Solace Technologies, a startup that makes nicotine liquid for e-cigarettes and vaporizers, rented a 500-square-foot basement office under the Transamerica building in Los Angeles. There was a window, but it looked into a parking garage.
"It was embarrassing, to be honest. Our office was between the building's gym and IT department," says Brendan McDermott, 29, one of Solace's four co-founders. "Eventually, we put two fern trees outside of our door, so people didn't think it was another IT closet."
It was a scrappy start, for sure. But the company, launched to capitalize on the burgeoning vape industry, is lighting up. In 2017, Solace made $3.7 million in revenue and is on track to make five times that much in 2018. It recently acquired its contract manufacturer, E-Generation. And it's won accolades--and the attention of Big Tobacco--with its unique formula of nicotine liquid, which fans say mimics the buzz of a cigarette.
Solace co-founders Lorenzo De Plano, 24, and Eric Anwar, 25, met while studying at the University of Southern California, while McDermott and Jomie Raymond, 28, were co-workers at another L.A. vape company. Rather than manufacturing a vape device, which is capital intensive, the team decided to focus the company on high-margin juice.
"The liquid is the razor blade--it's where you make your money," says De Plano, referencing Gillette's longtime strategy.
CREDIT: Courtesy company
What makes Solace unique is that its juice contains what's called nicotine salt. Most vape juices contain a form of the addictive chemical called freebase nicotine, which is not absorbed into the blood stream as quickly as nicotine salt. Many smokers start vaping in an effort to replace cigarettes, but freebase nicotine doesn't deliver the same rush as a combustible cigarette. Nicotine salt provides a rush similar to cigarettes' and mimics the "throat hit" that smokers seek.
Solace didn't invent nicotine salt; it's actually the natural state of nicotine, found in the tobacco leaf. In 2015, the vape company Pax Labs popularized nicotine salt liquid with a patented juice formula (inside disposable pods) that could be used with only its sleek e-cig, called Juul. By March 2018, according to Nielsen data, the Juul dominated the e-cig market with $454 million in retail sales.
But Juul's e-cigs are a closed system, meaning a user must buy its pre-filled cartridges from the company. Solace decided to create a business by selling juice for open systems like the iCare, Suorin Air, and MyJet. (On Solace's website it says you can jailbreak the Juul and refill the pods with its juice, too.)
"Juul is a closed platform like Apple, while we're catering to open systems like Android," says De Plano.
Solace's strategy seems to be working: In February 2017, Solace won the best new vapor product award for its nicotine salt juice at the 2017 Tobacco Plus Expo in Las Vegas. The company sells its liquid to consumers under two brands--Solace and Salty Man--and it also makes juice for about 20 companies, ranging from boutique vape juice brands to big tobacco companies. (Solace said it could not name the companies because it's bound by nondisclosure agreements.)
Still, Solace is a small player in a $5.5 billion industry, which itself is only a tiny fraction of the $85 billion tobacco industry. But vaporization is the future, says Bonnie Herzog, an analyst for Wells Fargo who studies the space. As sales volume for cigarettes have declined for decades, "reduced risk products," in industry parlance, continue to gain traction. "E-cigs and vaporizers will surpass combustible cigarettes in the next decade," she says.
Solace's founders say they expect the industry, which started with mom-and-pop companies, to be taken over by big tobacco within five years. The corporate takeover is indeed happening quickly--in 2017, British American Tobacco invested $2.5 billion to create new "reduced risk" nicotine delivery products, and every big tobacco company now has lines of e-cigs or vape systems.
"There is a huge opportunity as the tobacco industry is being transformed by disruptive innovation," says Herzog, even as the long-term health effects of vaping are still not known. What is clear, according to multiple studies, is that e-cigarettes are far less harmful than conventional cigarettes in the short term. (They do nothing to help users quit nicotine, which is highly addictive.) Cigarettes remain one of the deadliest consumer products in the world, claiming 480,000 lives in the U.S. a year, according to the Centers for Disease Control and Prevention.
A major challenge facing all nicotine juice companies, especially smaller independent ones like Solace, is that the U.S. Food and Drug Administration will require the companies to prove that their products are safe and effective alternatives to traditional cigarettes by 2022.
While industry giants like Juul, or big tobacco companies like Altria or British American Tobacco, which have their own e-cigarette brands, have the resources to comply with the FDA, "it's a risk to our business and challenge to deal with FDA's regulations," says De Plano, who is CEO.
Another risk to Solace, and every other vape juice companies that make candy- and fruit-flavored products, is the political pushback the industry is facing on flavors that appeal to kids. High school kids have co-opted e-cigs, which were originally made to help adults switch from traditional cigarettes to vaping, and parents and school administrators are looking for ways to stem the "explosion" of kids taking up the tech-infused nicotine habit. Earlier this week, New York Senator Chuck Schumer wrote a letter to the FDA demanding the agency ban "kid-friendly e-cig flavors" which he says are "helping to fuel a fire of e-cog addiction" among adolescents.
If fruit and candy flavors are banned, De Plano says Solace could easily whittle its product line down to its two flagship flavors--tobacco and mint.
Meanwhile, he says he has been meeting with multinational tobacco companies over possible deals--he wouldn't discuss details--and Solace has received at least one buyout offer from a company in the consumer space.
For the moment, though, the co-founders are choosing to elbow their own way into the industry. They've said goodbye to the basement office, and this summer will be moving Solace's manufacturing space to a 40,000-square-foot facility north of L.A. "We're not funded by Union Square Partners; we're not a hip company," says De Plano. "But we have created a valuable company."
This article has been updated to include recent developments related to teens and vaping.